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The limited nature of society's resources.
The study of how society manages its scarce resources.
all decisions involve tradeoffs.
society's: when society get the most from its scare resources vs when prosperity is distributed uniformly among society's member. (efficiency vs equality)
ex: going to a party the night before your midterms leaves less time for studying.
To achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic "pie."
the cost of something is what you give up to get it.
opportunity cost: whatever must be given up to obtained it. "the value of whatever you didn't choose"
very crucial in making decision. economic decision: greatest benefit to us at the lowest cost.
People think at the margin.
rational people: systematically and purposefully do the best they can do to achieve their objectives.
makes decisions by evaluating cost and benefits of the margins.
People respond to incentives.
incentive: something that indues a person to act.
example: when cigarette taxes increase, teen smoking falls.
Trade can make everyone better off.
especially when there's certain things you can produce, so you're better off letting someone else produce it and sell it to you. It would be insanely cheaper on your end. vice-versa.
Markets are usually a good way to organize economic activity.
Market: a group of buyers and sellers.
organize economic activity means determining whats good to produce, how to produce, how much of each to produce and who produce them.
a market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets.
- Govts can sometimes improve markets outcomes.
- roles: enforce property rights.
- if not enforced they are less likely to work, who wants to work and lose it.
- market failures: when the market falls to allocate society's resources efficiently.
- externalities: when the production or consumptions of a good affects by bystanders.
: a single buyer or seller has substantial influence on market price.
govt may alter market outcomes to promote equity.